Hello, I posted the below on the buying a home forum and thought it might be beterr over here? Also after posting, I think I should add that the question is not whether to buy the home, it is whether to pay cash or set up the deal as outlined. any comments appreciated.

I am considering buying a vacation home using the folowing and am interested in any thoughts as to what I may have missed or comments on its advisability (numbers changed for ease of analysis):background facts:Price 100 kliquid money to purchase 100kno traditional mortage available (75 rural acres, with manufacured home)

Results(?):I can deduct 10k in interest from my personal taxes (assume 40% Tax made up of 31% fed and 8% state) = tax savings of 4000corp gets 10k in income (assume 15% fed tax no state tax and no deductions -- trying to be conservative here) = taxes of 1500net tax savings = 25008500 of my money now sitting in corp for its investment (but subject to some flavor of taxation at pay out from corp).

A waste of time unless you're a Nevada resident. And I assume that you're not, as you mention a state income tax below. The corporation will be doing business in your home state, so it will need to register with your Secretary of State to legally do business. Now you have to file information each year with both Nevada AND your home state. Further, your corporate accountant will not be as familiar with Nevada requirements as s/he will be with your home state. So the cost of compliance will be higher.

Granted, Nevada has some corporate secrecy. But the required registration in your home state will blow that out of the water.

purchase 100 shares of corp at 1000 each.

You could also purchase one share at $100,000, or 1000 shares at $100 each, or 100,000 shares at $1 each. It is really immaterial unless you plan on selling part of your corporation in the future. And I suspect you don't.

Results(?):I can deduct 10k in interest from my personal taxes (assume 40% Tax made up of 31% fed and 8% state) = tax savings of 4000

Roughly correct. The real number will be a bit lower. Since you're paying less state income taxes, you'll have less of them to deduct on your federal return. And that will increase your Federal taxes a bit.

corp gets 10k in income (assume 15% fed tax no state tax and no deductions -- trying to be conservative here) = taxes of 1500

Sorry. This would be considered a Personal Holding Company. It's Federal tax rate will be the top individual rate, or 35%. And you will have to pay your home state income taxes.

net tax savings = 2500

Nope. Due to the PHC, this will turn around to a tax INcrease.

8500 of my money now sitting in corp for its investment (but subject to some flavor of taxation at pay out from corp).

You're also forgetting that, as an officer of the corp, you need to be paid for your corporate duties. Granted, they're pretty minimal, so there won't be much of a salary. But there really should be one, along with the associated payroll taxes.

There's also the annual compliance costs: tax return prep, corporate minutes, filing fees, and other such stuff. Individually, not much, but they could come up to as much as $1000 per year if you hire pros to do the work.

You'll actually have somewhat less income, depending on what the $100k is currently invested in. Cash and equivalents aren't earning much, but your long-term opportunity cost of stocks would probably be around 7%. So if the money is in equities, you'll have about $7k less in income each year on which to pay taxes.

Just found this on IRS site, which seems to say there will be a tax savings:

Home > Instructions Instructions

General Instructions Table of Contents

A Change To Note Purpose of Schedule Who Must File Personal Holding CompanyA Change To Note Effective as of January 1, 2003, the tax rate applicable to undistributed personal holding company income is decreased from 38.6% to 15%.

Just found this on IRS site, which seems to say there will be a tax savings:

PHC's are a rather esoteric beast. While I am generally aware of them, I've never actually worked with one.

The way I read things, (and it was a VERY quick read - I don't have a lot of time, but found the topic interesting) the PHC tax is in addition to the regular corporate tax. So in your scheme, the corporation would pay the 15% tax on the $10k of income, leaving $8,500 (less state taxes IMHO). THEN the PHC tax gets added in as 15% of $8500, or another $1275.

My bottom line:1. This would definitely be a Personal Holding Company.2. Personal Holding Companies are not a DIY undertaking. Get professional help.

yup definitely a personal holding company and the interest would deifintely be PHC income. More work to do to figure this out. The only neat way to take it out of PHC land is to spread the ownership in a way that is not possible for me or to have income other than PHC income (which would indeed make a NV corp unwarranted (don't agree with you on the NV corp otherwise -- interest is intangible and fleeting; can easily be sourced in and from different state legally -- until I find a case that says otherwise at least ;} )).

The things that I find most interesting are that the ownership limit is measured only in the latter half of the year and that the ownership quantification is expressed in terms of individuals (which includes trusts and qualified plans, but not corps expressly -- Query whether adding another corp (ca this time as it would be incvolved in an active trade in CA and not a PHC) to the ownership of the nevada corp solves the problem. If the Ca Corp owned 50% of the NV corp, my current hypothesis is no PHC at all (but a whole host of other issues to consider). I will research it somemore, but would welcome any more thoughts -- yours have been very helpful thus far as you hit the central issue. thanks.

PS: you are deifintely right on the double tax too: Corp pays on its own income, then Taxpayer must report his share of any retained PHC income on his own tax return as though it was a paid out dividened so you end up with at least a 30% tax -- which is still miniscully (sp?) better but not worth the trouble.